Role:
Accounting manager - review several accounting reporting issues, advise the CFO on appropriate treatments, and finalize the financial statements.
Key Users:
CFO - he requires the controller’s advice on the accounting treatments of the following issues and attaches importance to the profitability of the company.
Management team - they also attach great importance to the company’s profitability and growth.
Shareholders, creditors, and private placement investors - they will be relying on the financial statements to make decisions, therefore statements should be prepared in compliance with transparency. They also want maximum return on investments.
Auto manufacturers - as the major clients of Todd, they seek good performance of Todd so they will have more confidence in Todd and continue to trade.
CRA - they will be reviewing Todd’s financial statements to check the loss carryovers.
Constraints:
IFRS - the company has been following international accounting standards and has large worldwide subsidiaries.
Ethics - there is bias for Todd to realize deferred tax benefit since experiencing tax losses.
Income Tax Act - the tax act is a constraint since dealing with tax issues.
Issues and Analysis:
Issue #1: Recognition of income tax benefits from tax loss carryforwards in U.S. operations
The problem here is whether there is sufficient certainty to recognize the tax benefits that might be realized in the future if the tax losses are carried forward. Under IFRS, tax losses can be carried forward to future years if it is probable that future income will be available. To determine if it is probable that future income will be available, I referenced some possible sources of income from the textbook:
Future reversals of existing taxable reversing differences
Future taxable income before taking into account reversing temporary differences, tax loss, and other tax deductions
Taxable income available in prior carryback years
Tax-planning strategies that would, if necessary, be implemented to realize a deferred tax asset
As a matter of fact, none of the above income sources is available to the U.S. operation in the fiscal year. Furthermore, there were some unfavorable evidence:
There is history of tax losses for the most recent two years due to the decline of auto manufacturer industry.
The auto manufacturer industry is still unsettled and it is very likely that the company may need to take a few more years to recover from the decline and return to profitability.
To conclude, it is not probable that future income will be available therefore income tax benefits that will be derived from tax loss carryforwards should not be recognized.
Issue #3: Termination of obligation
The issue is whether to recognize the liability of $30 million or not. The recognition criterion used to determine if a liability should be recognized is on the basis of whether it is probable that there will be an outflow of resources. Probable is interpreted as “more likely than not”. In this case, Todd did not violate the terms of the contract and continued to pay for the products at the stated prices. However, knowing that Todd is unwilling to pay at market prices, the Canadian supplier continued to supply the products and bill Todd at market price rather the prices stated in the standing contract. Consequently, Todd may prevail in this arbitration and it is not probable that future outflow of resources will occur. The results will remain contingent until decisions are made by arbitration tribunal at the end of the following fiscal year. Since the liability criterion is not met, no liability is recognized in the fiscal year. Note disclosures are required about the nature of the contingent liability, the estimate of its financial effects, as well as the amount and timing of possible future resource outflows.
Issue #4: Demolition and site restoration costs for old facilities
In general, the obligation associated with the retirement or